Brexit Negotiations Update: Analyst Reactions and Updated Views on British Pound Outlook vs. Euro and Dollar

Above: The UK's David Davis and European Commission's Michel Barnier form the focus for Sterling trade today. Image (C) European Commission.

Pound Rises As Brexit Negotiator Davis Details Hopes for “Sufficient Progress”. Barnier imposes two-week deadline if trade and transition talks are to begin by December. 

The Pound extended earlier gains Friday after the latest round of Brexit negotiations appeared to augur a slow but steady march by Prime Minister Theresa May’s team toward the “sufficient progress” hurdle set by European negotiators.

Striking a confident pose, negotiator Michel Barnier said, in response to a reporter’s question, the UK will need to overcome Brussel’s sufficient progress hurdle within two weeks if talks are to move to the subjects of trade and transition by December.

The statement came closely on the heels of May’s representative in Brussels, David Davis, having told the press conference he is hopeful that “sufficient progress will be made” over the coming weeks.

While hard details of any kind of progress were notably absent from the summary given at the conference, both Davis and Barnier claimed to have broken ground on some of the key subjects, as well as smaller technical matters.

The “divorce bill”, Northern Irish border and enforcement of European Union citizens rights in the UK are all areas in which Brussels negotiators have set out demands they say must be met before discussions over a future relationship can begin.

The Pound-to-Dollar rate was marked 0.46% higher at 1.3201 around the time of the London close, after having sat close to a paltry 0.07% gain for much of the morning session.

The Pound was quoted 0.37% higher against the Euro, marking an extension of the morning's gains and making for a Pound-to-Euro rate of 1.1324.

Despite a non-event Barnier-Davis presser... #GBP moving higher. Guess negativity is embedded into these talks, its the norm. Maybe the two-week deadline gives some a glimmer of hope that we get an answer to the big 'Deal or No Deal' question. Loose attempt to rationalise move. https://t.co/ySAV2cdQcE

— Viraj Patel (@VPatelFX) November 10, 2017

Although David Davis stopped short of detailing any monetary offer at the press conference, he reiterate Theresa May’s earlier Florence pledge.

“European Union member states will not need to pay more or receive less throughout the remainder of the current budget period. And we will honour commitments we’ve made during our membership.”

European fears over a budgetary black hole, arising with the loss of its second largest net-contributor, and concerns that Brussels may not be able to finance some of the projects it has committed to are central to the monetary "sufficient progress" hurdle.

A more testing matter is the Irish border. With the integrity of the European Union “single market” and customs union in mind, European negotiators are reported to be pushing for an Irish border solution that would effectively leave Northern Ireland a part of the European Union.

David Davis said at the press conference the UK’s negotiating efforts will prioritise “upholding the Belfast and Northern Ireland agreement in all its parts”, but noted any deal must preserve the “constitutional and economic integrity of the United Kingdom.”

Analyst Thoughts:

Scotiabank's Osborne Says Not to be Taken in by Positive Headlines Friday  

"Positive headlines today do not remove either of the near-term political risks around a weakened prime minister or the longer run economic threats posed by Brexit," says Shaun Osborne, chief foreign exchange strategist at Scotiabank.

Capital Economics Say the Ball is Now in PM May's Court 

"The EU’s demand – that the UK be willing to create a customs border between the UK and Northern Ireland, in order to protect the integrity of the single market – finally became explicit this week," says Andrew Wishart, an economist at Capital Economics. 

Wishart says the hardening of Brussels' stance puts the ball firmly at the feet of the UK government.

"Note that aside from political concerns, given the majority of Northern Irish Exports go to the UK, this would also create a huge administrative challenge," Wishart adds. 

The UK government must now concede to Barnier's demands if talks are to move along to the subjects of trade and transition by the time December's European Council summit comes around, or come up with a plan B. 

"The EU’s Chief Negotiator, Michel Barnier, piled on the time pressure by saying any substantial movement in the UK’s position would have to come in the next fortnight in order for it to be put to the EU Council in December." 

MUFG Sees a Stronger Pound into Year-End, Subject to Progress

Lee Hardman at MUFG strikes an optimistic tone:

“The UK government is reportedly not expected by the EU to put a number on a financial offer at this stage but will have to have given an indication of their methodology including previous unpaid commitments.

“Our outlook for a stronger pound heading into next year is built on the assumption that sufficient progress will be made during Brexit talks in the coming months.”

Rabobank Forecasting a Lower Pound

Jane Foley at Rabobank believes negotiations will of to ‘the wire’ and this makes for a weaker Sterling:

“It is our view that GBP remains vulnerable to political uncertainly going forward most specifically regarding Brexit. Although we are optimistic that an EU/UK trade pact will eventually be agreed, all Brexit proceedings to date suggest that this could be a last minute compromise.  

“In the meantime uncertainty is likely to weigh on UK investment and growth potential. The implication of this is that GBP has the potential to slip further on a 12 month view before snapping back around March 2019. We retain a 12 month forecast of EUR/GBP 0.95.”

UniCredit Not Optimistic on Sterling

Chiara Silvestre an Economist at UniCredit Bank in Milan maintains a negative stance towards Sterling on the Brexit front:

"Given that a breakthrough in the new round of Brexit talks is unlikely, investors may start to become increasingly worried about time running out.

"This could lead to sterling weakness on the back of any disappointing headlines following this round of talks. From a medium-term perspective, the negative impact of Brexit on investors’ perception of the UK’s attractiveness as a place to invest makes us bearish on the GBP, especially against the EUR."

Danske Bank is Buying Euros

Chief Analyst at Danske Bank, Allan von Mehren, ackonwledges the outcome of the talks could prove to be a source of volatility.

"Overall, we still expect EUR/GBP to trade within the 0.8650-0.90 range in coming months with risks skewed to the upside near term as UK politics, Brexit uncertainty and relative rates are likely to remain EUR/GBP supportive.

"Tactically, we would consider buying on dips towards 0.88 with tight stops around 0.8760 for a new test of the 2 November high at 0.89389."

Commerzbank see Downside Risks Staying Elevated

Analyst Antje Praefcke at Commerzbank has been looking at the domestic political instabilities in the UK as reason to be bearish on both the progress of Brexit talks and trajectory of the Pound:

"How is a country going to negotiate in a unanimous and unified manner to the outside if within the ranks government members are tearing each other to pieces? As a result in my view the downside risks in Sterling continue to dominate, above all if disappointing economic data is added to the mix."

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.